Additional Materials:

Contact:

GAO discussed the results of its review of the Credit Research Center report on personal bankruptcy debtors' ability to pay their debts and observations on the February 1998 Ernst & Young report that also examines debtors' ability to pay.

GAO noted that: (1) both studies share two fundamental assumptions that: (a) the information found in debtors' initial schedules of estimated income, estimated expenses, and debts is accurate; and (b) this information could be used to satisfactorily forecast debtors' income and expenses for a 5-year period; (2) these assumptions have been subject of considerable debate, and the researchers did not test their validity; (3) with regard to the first assumption, the accuracy of the data in bankruptcy petitioners' initial schedules of estimated income, estimated expenses, and debt is unknown; (4) however, both reports also stated that to the extent the data in the schedules were not accurate, the data would probably understate the income debtors have available for debt repayment; (5) with regard to the second assumption, there is also no empirical basis for assuming that debtors' income and expenses, as stated in their initial schedules, would remain stable for a 5-year period following the filing of their bankruptcy petitions; (6) these two assumption--debtors' income and expenses remain stable and all repayment plans would be successfully completed--could result in a somewhat optimistic estimate of debt repayment; (7) neither report allowed for situations in which the debtor's income decreases or expenses increase during the 5-year period; (8) one difference between the two reports involve the calculation of debtor expenses; (9) a second difference between the two reports involves the calculation of mortgage debt and family size; (10) a third difference between the reports involves assumptions about repayment of secured, nonhousing debt; (11) on March 10, 1998, GAO received an Ernst & Young report that used a national sample of chapter 7 petitions from calendar year 1997 to estimate debtors' ability to pay; (12) the report appears to have addressed many of the sampling issues GAO raised regarding the Center report and February 1998 Ernst & Young report; and (13) however, the March 1998 Ernst & Young report shares the fundamental unvalidated assumptions of the Credit Center report and the February 1998 Ernst & Young report.